|Shares Out. (in M):||190||P/E||11.29||9.03|
|Market Cap (in $M):||18,697||P/FCF||0||0|
|Net Debt (in $M):||-4,277||EBIT||0||0|
|TEV (in $M):||672||TEV/EBIT||0||0|
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Imagine there is a country in the world with a population of ~19 million people. Imagine there is a company in that country that has three businesses: Payments, Marketplace, and FinTech (mostly BNPL). Payments business is similar to WeChat and PayPal / Venmo / Cash Square App. The Payments Business has ~70% market share (probably higher). The Marketplace Business is a 3P (with a tiny exception for e-grocery). Think about it as Amazon Marketplace in the US or Alibaba in China. Similarly, the Marketplace is the dominant player in the country. The third business is FinTech which is really unsecured consumer lending (mostly BNPL). This is business is similar to Affirm, Klarna, or AfterPay.
Financial metrics look pretty attractive:
1. Revenue is growing 40% - 50%.
2. Operating margin is above 50%.
3. Net income margin is above 40%.
4. ROE is above 80%.
5. The company also pays dividends and has a modest buyback.
CEO is not a founder but he has been running the company for ~15 years and owns ~23.5%+ of the shares. Chairman owns another 24.3%.
How much would you pay to own a partial ownership stake in such company? 20x PE? 30x PE? 40x?
Right now the stake is avaialble at a modest ~11.3x PE for 2023. The company is listed in London but US uplisting is quite likely in the near future which could serve as a catalyst.
Where is the catch? The country is Kazakhstan (“KZ”). The company’s name is Kaspi.
Before digging further, let’s size up the TAM.
• KZ has a population of 19.3M people
• Nominal GDP = $224.338B (2022; estimated)
• Nominal GDP per capita = $11,591 (2022; estimated)
• Tenge (KZT) is the name of the currency. The FX rate was ~350 in early 2016 and it is ~450 now.
o KSPI reports in KZT. Throughout this write-up, for convenience purposes I would be using 450 as the FX rate even if those numbers relate to 2022.
• Oil and gas (O&G) is very imporatnt for KZ’s economy. Hence, if you are long Kaspi, in my opinion, you are to a degree long oil.
Strategy: High-Level View
At the core of Kaspi’s strategy, there are two fundamental ideas / concepts: (1) super app strategy and (2) power of data.
Idea #1: Super App Strategy
Kaspi is a textbook example of the super app strategy. Kaspi developed a solution (Payments) and engaged consumers. Kaspi provides substantial (if not massive) value: empowering its users to pay utility bills, traffic violation penalties, etc. online and doing so seamlessly. Then Kaspi empowered merchants and consumers to use its app to conduct commerce. Once Kaspi has consumers using the app regularly and engagement was high and the product delighted consumers and consumer keep coming back, Kaspi started layering more services and more products. Since there is a habitual usage of the app and consumers trust Kaspi and love the experience, consumers are happy to start using the app for other purposes and engage with new products. Kaspi’s job is to search for new consumer needs, build products addressing those needs, and then figure out how to build a business around those products (or do those two things simultaneously). Kaspi has proven to be excellent at it.
This is a somewhat simplified overview of what Kaspi has been doing, but conceptually it is what Kaspi has done.
#2: the Power of Data
Kaspi sits on massive amount of data from all of its three businesses: Payments, Marketplace, and FinTech. This creates unprecedented competitive advantages. I will share just two examples.
First, Kaspi is in an envious position to do better loan underwriting vs. other players because Kaspi has plenty of data from its Payments and Marketplace businesses about a particular borrower: how much do you send, how much do you spend, what you buy, etc.
Second, when Kaspi launches a new product or service, it has very good data about the size of the opportunity and consumer behavior via its Payments business and Marketplace business. In other words, compared to any other company Kaspi knows a lot more before launching a new product and has a lot clearer idea how it would monetize it.
With high level strategy points behind us, let’s dig into highlights of all three businesses.
Business #1: Payments Business
Payments Business: Overview
Payments is what first and foremost has enabled Kaspi to become a super app. First users got used to using the payments app, developed affinity and loyalty and formed habits, and then they have become users of all other services that Kapsi offers. This is, of course, an over-simplistic explanation of what has happened, but it frames the history well.
Payments Business: Key Metrics
• 12.1M active customers as of 2Q 2023
• 529K active merchants
• Total payment volume (TPV) = KZT 23.7T in 2Q 2023 or ~$52.67B
• Not all of that TPV volume generates revenue for Kaspi. RTPV (revenue generating TPV) = KZT 6.7T or ~$14.9B
• Take rate = ~1.30%
• Gross margin = 90%+
• Operating margin = 75%+
• Net income margin = 60%+
• Net income is ~ ~37.5% of total net income (as of 2Q 2023)
Since this is the first time when I am introducing the segment margin structure, it is worth explaining how Kaspi reports the segment data, which is unusual. Kaspi reports revenue, COGS, OpEx (by line item), operating income, and net income for each segment. Kaspi provides a very detailed segment breakdown, and the level of disclosure is substantially better than what I am accustomed to dealing mostly with US companies.
CAGR from 2017 – 2Q 2023 would look ridiculously high because TPV in 2017 was only KZT 0.4T and RTPV was KZT 0.37T. If we use a run-rate of 2Q 2023, then two metrics have grown ~235x and ~72x respectively. As I said, very high growth. I view growth in recent years to be more relevant for today’s analysis.
TPV growth rates:
- 2019 = ~307.5%
- 2020 = ~177%
- 2021 = ~111%
- 2022 = ~38%
- 1Q 2023 = ~50%
- 2Q 2023 = ~44%
RTVP growth rates:
- 2019 = ~146%
- 2020 = ~81%
- 2021 = 106%
- 2022 = 55.5%
- 1Q 2023 = 61%
- 2Q 2023 = 45%
Payments Business: Growth Prospects
Kaspi has brought the KZ’s economy from cash to digital in a matter of just a few years, which is impressive in and of itself. I do not believe that triple digit growth rates are possible anymore, but a CAGR of 25% - 30% for the next few years should be achievable.
There are few drivers to achieve a CAGR of 25% - 30%:
1. More active users.
a. Payments Business has ~12.1M active users while the entire Kasp app has ~13.2M and that number has been growing. Hence, I think the Payments user base could grow to 13M+.
2. Engagement / RTPV per Customer
a. RTPV per customer was ~$1,230 in 2Q 2023 which equates to a run-rate of ~$4,921. An average salary in KZ is ~$9.5K - $10K. Eventually the entire spend by KZ consumers can be done via Kaspi (likely not happen but there is good room for growth). When we look at an average salary, we should subtract savings and any TPV that is not subject to a commission. In my opinion, RTPV per customer could go up ~40% - 50% in the next several years.
If KZ economy grows and salaries rise, then the RTPV per customer has even more upside.
What I described above is more of a top-down approach. Here are some data points if we consider the same issue from the bottom-up approach.
As of 2Q 2023, ~529K merchants were on the platform of Kaspi. In a few yeaers Kaspi could get to 600K to 700K merchants. The more places where consumers can use Kaspi Payments, the higher RTPV per customer could grow.
Payments Business: B2B Initiative
An additional growth driver is Kaspi’s B2B initiative in Payments.
Historically, Kaspi Payments was a B2C and C2C product. Now it is changing.
Kaspi is focusing on the value chain of goods getting from a manufacturer to a consumer. Simplistically, this is how the chain looks like: manufacturer – wholesaler – retailer – consumer. Sometimes a wholesaler can be omitted. Sometimes there can be more than one wholesaler. The more links are in the chain, the higher potential RTPV that Kaspi can serve. Kaspi’s solution targets manufacturers and distributors who deal with a lot of local merchants. For example, a hypothetical Coca-Cola or Pepsi sells goods to distributors and then those distributors sell the product to local merchants across entire Kazakhstan.
How big B2B Payments could become? The first avaialble data point relates to 1Q 2022. This is how the RTPV B2B trajectory looks like:
- 1Q 2022 – KZT 0.04T
- 2Q 2022 – KZT 0.09T
- 3Q 2022 – KZT 0.16T
- 4Q 2022 – KZT 0.19T
- 1Q 2023 – KZT 0.17T
- 2Q 2023 – KZT 0.27T
So it is growing incredibly fast but off a low base.
This is my hypothetical math to size an opporutnity. Assume that the retail (B2C) RTPV = 100. In other words, consumers pay 100 to retailers. Assume further that there are two prior steps: manufacturer => distributor => retailer => consumer. Assume that manufacturer sells goods for 100. The distributor makes a mark-up of 15% and sells to a retailer for 115. Retailer makes a mark up of 30% and sells goods for 149.5. So, the two-step potential RTPV = 100 + 115 = 215 which is ~1.45x the size of the retail B2C RPTV.
Admittedly, this is a rough math exercise and my assumptions about mark-ups are rough estimates. Furthermore, the current B2C RTPV includes both goods and services. However, this exercise is useful to size the opportunity.
As Kaspi gets valuable data about payments flows for local businesses, it can also provide working capital financing product, and Kaspi is in fact already experimenting with those.
Business #2: Marketplace Business
Marketplace Business: Key Metrics
• 6.6M active customers as of 2Q 2023
• GMV in 2Q 2023 = KZT 856B or ~$1.9B or run-rate of ~$7.6B
• Take rate = ~8.5%
• Marketplace active merchants = 317K as of 4Q 2022; the company stopped disclosing this metric.
• Gross profit margin = 85%+ (ignoring e-grocery business which is 1P business and therefore dilutes the gross profit margin)
• Operating margin = ~75% (again – ignoring e-grocery business which is 1P business and therefore dilutes the gross profit margin)
• Net income margin = 60%+ (again – ignoring e-grocery business which is 1P business and therefore dilutes the gross profit margin)
• Net income is ~23.8% of total net income (as of 2Q 2023)
Marketplace Business: Growth Prospects
First, Kaspi can grow the active customer base. Payments Business has ~12.1 customers which is substantially higher than 6.6M active customer in the Marketplace Business. There is substantial room to grow from current ~54.5% penetration to a higehr level. In my opinion, Kaspi could achieve 70% or even 75% penetration level.
Second, the merchant base also has room to grow.
Business #3: FinTech Business
FinTech Busienss: Overview
Within its FinTech Business Kaspi offers loans to consumers and takes deposits. Let’s keep in mind that Kaspi started as a bank Kaspiyskiy year ago. Kaspi primarily provides unsecured consumer loans, including BNPL loans.
FinTech Business: Key Metrics
- 5.9M active customers as of 2Q 2023
- ~$1,240 average loan amount outstanding per consumer (e.g., the same consumer may have several loans from Kaspi)
- NPLs as of % of gross loans = ~6.12% as of 2Q 2023. Kaspi does a very a good job underwriting loans and avoiding fraud by leveraging its data from Payments and Marketpalce businesses.
- Net income is ~38.7% of total net income (as of 2Q 2023)
Quality of Execution
We can look all day long at financial and operating metrics and get a sense that Kaspi executes well. However, a recent real life example would likely provide an even better overview of both quality and speed of execution. Let’s talk about Kaspi Travel.
In 2H 2020 Kaspi launched its new product – Kaspi Travel that gives its users the ability to buy air and train tickets. A couple of years later Kaspi also offered travel packages that are quite popular in KZ and neighboring countries. Kaspi went from ~11K purchases in 3Q 2020 to 4.1M purchases in 2Q 2023. GMV was ~KZT ~2B in 4Q 2020; it reached KZT 96B in 2Q 2023.
In other words, within a couple of years Kaspi has become the largest seller of air and train tickets.
In my opinion, Kaspi’s ultimate game (similar to any other super app) is to digitize as many verticals of the economy as they can, bring value via convenience and efficiency, delight its customers, and take a fee (broadly defined) or a tax or a toll from those verticals.
Kaspi has made modest acquisitions in Azerbaijan and Ukraine. While some people believe / hope that Kaspi expands into other countries (e.g., going into Uzbekistan could expand TAM massively), I am hesitant to underwrite future geographic expansion. If that happens, however, it could present a significant upside.
Insider ownership is very high.
CEO Mikhail Lomtadze owns ~23.5%.
Chairman Vyacheslav Kim, owns ~24.3%.
Baring Vostok, the leading PE firm in the CIS region, owns ~28.5%.
Other members of the management team own ~3%.
It means that free float is ~20%.
Fist, Kaspi invests in growth.
However, given its very high margins, it still leaves plenty of FCF to be distributed. Kaspi paid ~$466M in dividends in 2022 (using 450 FX rate) and in 2023 so far paid ~$570M in dividends (using 450 FX rate). On the per share basis, it was ~$2.34 in 2022 and $3+ in 2023.
Kaspi also has a modest buyback program that it is actively executing. There are obvious liquidity limits on how many shares Kaspi could buy.
On its earnigns calls, Kaspi has said that the goal is to return at least 50% of net income to shareholders.
NASDAQ or NYSE Uplisting
Kaspi is listed in London. I believe that Kaspi remains not very known among investors. One of the reasons for low investor awareness is its listing in London. Kaspi management has spoken about doing an uplisting. I would not be surprised if the uplisting is just around the corner. Let’s look at management’s language.
1Q 2023 EC:
“on the US listing … we don’t want …get boxed into any particular timeframe simply because … it is contingent on market to a large extent rather than ourselves. But all of … workstreams that are necessary to make that happen … things like legal and accounting are all now actively taking place. And we would hope that it would be possible that market conditions would allow us to complete this transaction before the end of this year. That’s not going to be the first half. It’s likely to be the second half. But again, it is ultimately contingent on the market” [NOTE: edited for clarity]
2Q 2023 Earnigns Release:
“Our commitment to ensuring Kaspi.kz is listed on the most appropriate exchange remains unchanged.”
Hmm… What does that mean? Not surprisingly, one of the sellside analysts asked about uplisting on 2Q 2023 EC. Here is what management answered.
“on the US listing. Let’s say a couple of things. So number one, I’ll draw your attention to comments in previous press releases and on previous conference calls, including as of 3 months ago. So that’s the first thing. Second thing would be today’s press release is quite clear. We remain committed. We’ll update the market at the right time. So I would just add to that, that these processes come with rules, regulations about what can be said and what it can be said. So that’s just … wait and see.” [NOTE: edited for clarity]
Reading between the lines makes me think that it is quite possible that Kaspi could have already made some regulatory filings in the US. I guess we would find out in the next few months whether my interpretation is correct.
I also expect that an uplisting would likely be accompanied with a share offering. However, I believe that any shares offered would be secondary and not primary shares.
In 2023 Kaspi is likely to generate between $8.50 and $9 in EPS. I see a path to ~$15 EPS in 2026. I am using these multiples for NTM earnigns: 10x in bear case, 15x in base case, and 20 bull case. The valuation date is December 31, 2025, when I am using 2026 EPS estimates.
Please note that I am ignoring:
(1) Future share dilution that has been quite modest
In a way, I call the net result of these three contributing factors to be a wash.
I expect a pushback on the multiple assigned in the bull case: 20x for a great company in an emerging market is too rich. Maybe. However, I have two counterpoints. First, at various points in time MELI and SEA were trading at very high multiples of revenue, not earnings. Second, not long time ago Kaspi was trading at 15x – 20x PE going out one or even two years.
These points do not fit into other parts of the write up, but they are just so illustrative of the dominance that Kaspi has that I wanted to highlight them.
• An average active customer uses Kaspi Pay app 66x / month (2Q 2023). That number was ~32-33 in 1Q 2021 and since then continues to hit new highs.
• You can renew your driver license via Kaspi app.
• You can register yourself with the KZ government as a solo entrepeneur via Kaspi app.
• During COVID-19 pandemic the KZ government distributed payments to KZ citizens via Kaspi.
First, there was a Forbes article questioning ownership structure of Kaspi shares. Please see the link: https://www.forbes.com/sites/daviddawkins/2020/11/25/the-two-billion-dollar-mystery-behind-the-ownership-of-london-listed-kazakh-fintech-kaspi/
Second, KZ is an emerging market / developing country. KZ’s laws, regulations, and political system are all different from what US investors are accustomed too. One needs to carefully think through those risks. Dorothy has put it best: "Toto, I've a feeling we're not in Kansas anymore".
Third, Kaspi operates in the KZT environment and derives its revenue and earnigns in KZT. A USD denominated investor would face an FX risk.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
2. Earnigns growth
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